Over the last year or so, I’ve read a lot about how Best Buy Co., Inc. (NYSE:BBY) is in trouble. Analysts have suggested that the company can’t compete on price with Amazon.com, Inc. (NASDAQ:AMZN). Others have suggested that the move toward digital distribution is killing off part of Best Buy Co., Inc. (NYSE:BBY)’s sales. However, I can also tell you that only about half of what is written about the company is true. Best Buy is actually doing several things right. The problem is, management needs to be more aggressive with their plans.
I Can’t Believe It, Best Buy Is Finally Coming To Its Senses!
I won’t suggest for a minute that I’ve been a fan of CEO Hubert Joly and Best Buy Co., Inc. (NYSE:BBY). In fact, the last time the company reported earnings, I blasted the company and said that I hate it when companies say they are in a “year of transition.” Usually what this means is, don’t expect much from us, because we don’t really know what we are doing.
However, I’m also big enough to admit when a company takes bolder steps than I believed they would. Joly surprised me by saying the company made a “decision to reduce sales in certain non-core businesses.” He also said that the company was engaged in, “efforts to optimize the allocation of our retail floor space to more attractive product categories.”
In addition, Best Buy Co., Inc. (NYSE:BBY) finally made a hard choice and found a buyer for their European operations. The sale of 50% of Best Buy Europe causes the company short term pain, but is a positive for the company’s longer-term survival.
It’s About Time, Because The Competition Isn’t Standing Still
To be fair, Amazon.com, Inc. (NASDAQ:AMZN), Wal-Mart Stores, Inc. (NYSE:WMT), and even GameStop Corp. (NYSE:GME), have been eating into Best Buy Co., Inc. (NYSE:BBY)’s business for a little while now. Amazon.com, Inc. (NASDAQ:AMZN) gets 64% of its sales from electronics and general merchandise. Though sales have slowed, the company is still growing merchandise sales by 30%.
Wal-Mart Stores, Inc. (NYSE:WMT) isn’t standing still either. The company said that over the holidays they took market share in the electronics area. The company offers just enough computers, tablets, video games, and televisions, to be a thorn in Best Buy’s side. The fact that there are four domestic Walmart stores for every one Best Buy is yet another challenge. Walmart is a one-stop shop, and an extra stop at Best Buy doesn’t happen as often as it used to.
GameStop Corp. (NYSE:GME) is taking gamers out of Best Buy. The company gets 47.8% of its profits from used games, and Best Buy just can’t match GameStop when it comes to selection. GameStop also hires salespeople with more in-depth knowledge of the games, which leads to better customer loyalty. If you want proof that Best Buy is struggling in these areas, consider that domestic same-store sales of Consumer Electronics were down 5.4%, and Entertainment same-store sales declined by almost 28%.
3 Core Improvements
One of the nicer surprises for Best Buy investors was the improvement in same-store sales. Though sales were still down, on both the domestic and international front, the same-store sales decline was less severe than last year.
Second, the company’s focus on its strengths continues as the Computing and Mobile divisions now make up 47% of total revenue, up from 44% last year. Since one of the attractions to Best Buy is their dividend, it is also reassuring that excluding the loss on the sale of the European business, their core free cash flow (net income + depreciation – capital expenditures) payout is just 44.27%.
The 3 Big Issues
Even though Best Buy is improving their business, the company still needs to be more aggressive. First, they need to consider exiting the international business completely. Best Buy international is a mess. This unit has worse overall sales results, worse same-store sales, a lower operating margin, and only represents about 15% of total revenue. Just like the company’s European operations, the whole international division needs to be sold.